WV Center on Budget and Policy > Blog > Taxes > Debunking Tax Reform Myths – UPDATED 12/1/2017

Debunking Tax Reform Myths – UPDATED 12/1/2017

Myth 1: Tax reform will pay for itself.

One of the most persistent myths about tax cuts is that they can boost the economy enough to offset their costs. In other words, tax cuts pay for themselves, adding to neither federal deficits or debt. Claims about the current GOP tax reform go even further, claiming that the tax plan would generate enough economic growth to more than offset its cost. According to Treasury Secretary Steven Mnuchin, the tax plan, “will not only pay for itself, but it will pay down debt” and generate $2 trillion in additional revenue, reducing federal deficits by $1 trillion.

The vast majority of economists disagree, instead predicting that cutting taxes by $1.5 trillion will in fact increase the federal deficit. The claim that tax cuts pay for themselves, or in this case, more than pay for themselves, is not supported by the evidence. According to the Congressional Budget Office, under the most optimistic projections, roughly 32 percent of a 10 percent  income tax cut can be offset by additional tax revenue over ten years. For Secretary Mnuchin’s claim to be correct, that 32 percent would have to increase to 166 percent under the GOP tax plan.

Myth 2: The tax plan is a “major, major” tax cut for the middle class.

From the President on down to local legislators, proponents of the GOP tax plan have been claiming that tax cuts for the middle-class are the primary feature of the tax plan. Many of the provisions of the tax plan that would benefit the middle-class, such as the increase in the standard deduction, are offset by other provisions, like eliminating the personal deduction and raising the bottom bracket’s rate. Other provisions, like the expansion the child tax credit, appear on the surface to be geared toward working families, but actually provide little benefit.

Overall, both the House and Senate versions of the tax plan heavily favor the wealthy. According to the Institute on Taxation and Economic Policy, the wealthiest one percent of Americans would receive 26 percent of the benefits of the Senate’s plan, and 48 percent of the benefits of the House’s tax plan, while the middle 20 percent of taxpayers would only receive around 10 percent of the benefits under both plans.

Analysis from both the Joint Committee on Taxation and the Tax Policy Foundation confirm that the tax reform plans favor the wealthy, even in West Virginia.

Under the Senate’s plan, the top one percent would receive a average tax cut as a share of income of 1.7 percent, worth an average of $43,300, while the House’s plan gives the top one percent a tax cut of 2.5 percent or $64,720. In contrast, the middle 20 percent’s tax cut under the Senate plan is only 1.1 percent, or $77o, and just 0.6 percent or $460 under the House’s plan.

Some of the provisions in the House bill that benefit the middle-class — like lower tax rates and fewer brackets, an increased standard deduction, and a $300 tax credit for each adult in a household — are designed to expire or become less generous over time. Other provisions that benefit the wealthy, such as the reduction and eventual repeal of the estate tax, become more generous over time. The result is that by 2027, the benefits of the House bill become increasingly generous for the richest one percent compared to other income groups.

Myth 3: Cutting corporate taxes will give the average household a $4,000 pay raise.

Both President Trump and House Speaker Paul Ryan have claimed the the GOP proposals to cut corporate taxes will give the average American household a $4,000 pay raise, pointing to an analysis from the President’s Council of Economic Advisers (CEA). The analysis relies on the assumption that nearly all of the corporate income tax is paid by workers, so that any cuts in the corporate income tax would directly result in pay increases.

While it is agreed that some of the corporate income tax is paid by workers, the broad consensus of economists says that workers pay a much smaller share of corporate taxes than what the CEA is claiming. The CEA analysis claims that a $200 billion cut in the corporate income tax would increase wages by $500 billion, implying that 250 percent of the corporate income tax falls on workers, which is almost comically outside the plausibly acceptable ranges. For example, the Treasury Department estimates that 18 percent of the corporate income tax falls on workers, the Tax Policy Center estimates 20 percent, and the CBO estimates 25 percent. Secretary Mnuchin’s claim that 70 percent of corporate taxes are paid by workers is more plausible, but still well outside the mainstream consensus.

Most evidence shows that most of the benefits of a corporate rate cut goes to the owners of corporate and other types of capital — not workers. Whatever share of a corporate rate cut eventually flows to workers would likely do so in proportion to their share of total wage and salary income. And since labor income is concentrated among high earners such as highly paid executives, lawyers, and other professionals, most of the benefits would go to them. According to the Tax Policy Center, the top one percent would receive 34 percent of the benefits of cutting the corporate tax rate, and the top 20 percent would receive 70 percent of the total benefits.

Myth 4: It’s a tax cut for everybody

Proponents of the GOP tax plan have repeatedly claimed that the plan will help all taxpayers. House Speaker Paul Ryan has repeated this claim  in a series of interviews, stating, “It’s a tax cut for everybody… every single person, every rate payer, every bracket person gets a rate cut.”

In fact, under the House bill, 18 percent of households would face a tax increase by 2027, including households at every income level. For the middle 20 percent, 21 percent of households would see an increase in their taxes by 2027. This would occur because several provisions in the bill raise revenue by repealing or limiting tax breaks that benefit the middle-class, and for some households the loss of these tax breaks would not be offset by the new tax breaks introduced in the bill.

Under the Senate bill, 13 percent of taxpayers would pay more by 2027, again including households at every income level. For high-income taxpayers, whether the Senate plan results in a tax increase or tax cut also has to do with the type of income he or she has. The plan’s reduction in the corporate income tax rate is likely to benefit particularly those who own corporate stocks. Those who own a part of a business that does not pay the corporate income tax (often called a pass-through business) would benefit from the plan’s deduction for that type of business income. Taxpayers who do not own corporate stocks and earn all or most of their income as wages are less likely to see a net tax cut.

Myth 5: Tax Cuts will Significantly Boost the Economy

One of the main talking points about the the GOP tax reform plan, and every other tax cut, is that tax cuts will unleash the economy, leading to a new era of economic growth and prosperity. President Trump has claimed that that tax reform could lead the economy to grow at more than 6 percent per year, more than triple the forecasted rate of 1.8 percent.

Here in West Virginia, we’ve been told that the tax cuts, that again, mainly benefit the wealthy, could “rejuvenate West Virginia’s economy,” that it is a “once-in-a-generation opportunity” to spur economic growth, and that we need to get tax cuts “passed as soon as possible to grow the American economy.

West Virginians know that even major tax cuts don’t necessarily lead to economic growth. But the idea that tax cuts will boost the economy isn’t just a myth for West Virginia, it’s a myth for federal tax cuts as well. Tax cuts in the past quarter century have consistently failed to significantly boost the economy, create jobs, and increase middle-class incomes. And not only did federal tax cuts fail to create growth, tax increases didn’t have any negative effect.

The lack of evidence for tax cuts boosting growth helps explain why the Trump administration and its allies have struggled to find any credible economic model to support their claims. Even the analysis from the tax-cut friendly Tax Foundation falls short of the claims that economic growth from the tax cuts will be outstanding enough to offset its cost. But even then, the optimistic projections from the Tax Foundation are substantially flawed, and those flaws are causing the analysis to substantially overstate the effect on GDP.

Myth 6: Small Businesses will Receive Huge Tax Cuts

Just as advocates have claimed that the tax cuts in the GOP tax reform plans are primarily geared toward the middle-class, they have also claimed that the business tax cuts in the bill will benefit small businesses. And like the middle-class claim, the small business claim is largely a myth.

In addition to reducing the corporate income tax rate from 35 percent to 20 percent, the plans also create a new “pass-through” rate of 25 percent. Pass-through income is income from businesses such as partnerships, S corporations, and sole proprietorships that business owners claim on their individual tax returns and that’s taxed at the same rates as wages and salaries. So instead of paying the top personal income tax rate of 39.6 percent, business with pass-through income would pay 25 percent.

And as it turns out, most pass-through income flows to the very highest-income people, and from very large businesses. The top 1 percent of filers reap more than half of all pass-through income. Very few small businesses would benefit from this new rate.

In fact, the National Federation of Independent Businesses has come out against the bill, saying in a statement that, “This bill leaves too many small businesses behind. We are concerned that the pass-through provision does not help most small businesses.

 

***UPDATE 12/1/2017***

Earlier this week, the Joint Committee on Taxation (JCT), a nonpartisan committee of the United States Congress that acts as a scorekeeper for Congress, released two reports on the Senate tax plan that officially debunk two of it’s major myths. First, the committee released a report on the distributional analysis of the tax plan, which debunked the claim that everyone would get a tax cut under the tax plan. According to the official analysis, the plan would raise taxes on 8.1% of taxpayers in its first year, while providing only minimal tax cuts to 30.2% of taxpayers. By 2027, when certain provisions expire, the plan would raise taxes on 22.9% of taxpayers, while providing only minimal tax cuts to 61.2% of taxpayers. The results are even worse for low and middle income families, who are more likely to see their taxes increase. By 2027, 88% of middle income earners would be left out or have their taxes increased by the Senate’s tax plan.

Next the JCT released a report debunking the claim that the tax plan would pay for itself, not add to the deficit, and actually generate enough revenue to pay down the debt. According to the JCT report, the tax plan would increase federal deficits by a total of $1 trillion, even accounting for economic growth. The deficits top $200 billion/year before the temporary provisions expire.

 

 

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